In an article dated 2/15/2018, titled “Trend Following in One Minute a Month”, I wrote about one of the simplest trend-following methods I’ve ever discovered. The original idea was based on work by investor and Forbes columnist Kenneth Fisher (his original idea is discussed in How to Tell a Bull Market from a Bear Market Blip).
For full details plus facts and figures please see the original article of mine linked above. For now:
Jay’s Monthly SPX Bar Chart Trend-Following System
a) When the S&P 500 Index goes three calendar months without making a new high, then
b) Draw a horizontal line at the low price for those three calendar months.
c) An actual sell trigger occurs at the end of a month during which SPX registers a low that is below the “sell trigger price” (i.e., the trade takes place at the month regardless of when the signal occurs during the month), HOWEVER,
d) If SPX makes a new monthly high above the previous “swing high” BEFORE it registers a low below the “sell trigger price” the sell signal alert is aborted.
For the record, sell signals since 1970 have been right roughly 50% of the time, so this is NOT a “sure thing, you can’t lose” strategy by any stretch. Still the average losing trade witnessed a decline of roghly-16%, with 3 generating a loss of 20% or more, and two of those were in excess of -30%.
The latest status appears in Figure 1 below. As you can, 3 of the last 5 “sell” signals ended in whipsaws, which resulted in buying back in 6%, 9% and 8% higher, respectively. However, the key point is that the other two sell signals would have allowed an investor to miss the crushing -33% and -31% declines.
Figure 1 – Jay’s “One Minute a Month” Trend Following Method
(For more signs of potential trouble see also Two Charts Worth Watching)
The Bottom Line
If the S&P 500 Index closes below 2,532.69 without first making a new 6 month high, it could be a significant warning sign of trouble ahead (Or – in the interest of full disclosure – it could just be setting up whipsaw; sorry folks, that’s how the market works sometimes).
Welcome to the exciting – and occasionally frustrating – World of Trend-Following!